Resource Management in Education and the Public Sector - Coursework Example

Institution Title: Resource Management in Education and the Public Sector Course Code Date Best Practice Financial Management Introduction Best practices financial management covers financial corporate financial concepts that affect a business operation and decision making. These include accrual accounting, budgeting, management and reporting. The study of organizational administration and management equips people with the knowledge required to run business organizations. These studies facilitate better management of resources in the education and public sectors. According to Corbett, 1992) management and administrative studies equip people with skills on leadership, organization and resources. Financial management is responsible for ensuring that all stakeholders, internal and external are able to control and develop financial resources plans. It ensures timely availability of information to the right people. The information is used in controlling the demand and supply side of the organization. This paper discusses best financial practice, its concepts and the concept of transparency and accounting tools that public sectors employ. Financial management is likely to be affected by another of factors through its four concepts. The financial management system is affected through factors that affect the demand and supply of the management system. Supply of financial management is affected by organization’s processes, information they acquire and systems implemented. The capability of the organization and its leadership also affect the supply of its financial management. Demand for financial management is affected by company’s internal governance, the external governance and financial agendas provided by the federal government. The system is indirectly supported and driven by a number of factors within and outside the system as indicated in the diagram below: Accrual accounting Accrual accounting is a concept of best financial management that both private public sectors applies control their accounts. This concept involves recognition of the accounting elements. This accounting concept identifies revenues earned by the organization and compares to the respective expenses. Normally, accounting concept of revenue and expenses considers aspects of time and follows the order in which transactions occur. Accrual accounting does not consider the element of time but identifies the specific expenses that have given rise to specific revenues. The expenses are recorded as they occur where actual payment has not been settled. Accrual accounting is important especially to organizations with inventories which apply tax accrual methods (Carlin, 2005). Due to the complexity in business operations and desire for accuracy in financial statement preparation, Accrual accounting was considered suitable. Events were more relevant when recorded and reported the same period they occurred. This avoids the long streams of revenue that accumulate over time as a result of credit sales. Such streams might affect company’s financial situation at the point of transactions. Accrual accounting has also been criticized by users and stakeholders. According to Clare (1994), recognizing revenues before payments can lead to financial imbalance in the company. This will occur as a result of misrepresentation of financial accounts since some earned revenues might not be paid. The misrepresentation might result to financial downturn in the company in the future date. The firm’s future earnings are likely to suffer when clients fail to honor the already recognized revenue. Accumulated doubtful payments in company’s earnings and revenues might be understated. This will give a wrong impression of the company’s status. Accrual accounting poses a challenge to the stakeholders since they might fail to understand the extent to which revenues have been puffed with nonpayment. Budgeting Budgeting is one of the best financial practice concepts that involve identifying sources of fund and adequately allocating such resources to business activities. Budgeting ensures that cost effectiveness is observed and the organization’s interests are considered in allocation of resources. While budgeting, sources of funds being budgeted for are considered. The sources are then matched with outcomes from organization activities. Long term policies and goals are also requisites for budgeting. The strategies should be arranged in order of priority to the organization. Each activity is then gaged in terms of their cost effectiveness and viability to the organizations expected outcome. Organizations operate under a federal government which provides rules and regulations to govern budget preparation. Budget preparation, review and submission must therefore comply with the stated processes (Rabin, 1992). Efficiency and effectiveness are financial issues that define financial management activities of a unit. Effectiveness in budgeting can be attained through appropriate alignment of funding and expenditures. These budgeting elements should be aligned with the organization’s strategies in order of their priorities depending on the organization’s interests. Key players in budgeting also need to understand what the organization’s expectations of performance are (Lynch & Martin, 1993). Budgeting focuses on a number of objectives that are beneficial to the organization and the environment it operates in. budgeting is done in order to identify the amount of income an organization needs. Income used in public sector is as a result of fees and taxes charged by the government. Current levels of income are identified and matched with the expected expenditure levels for the next year. Budgeting also targets at planning services and issuing authority for use of funds. Expenditure is therefore limited to the funds budgeted for. This enables the management to focus on key and specific issues that the organization has prioritized. It plays the role of motivating managers especially if the managers are involved in formulation of the budget, they will dedicate their efforts to attaining it. The budgets create a central element of expenditures with a common source of direction for all organization players. As a result, all performances are providing for with a basis for measurement. Line items budgets focus on the nature of income and expenditure items unlike revenue budgets that focus on levels of income and expenditures. The budgetary process would take different dimensions depending on the type of budgetary module a company chooses to adopt. Incremental approach focuses on current economic result for growth and modulation approximations. The following year’s budget is then based on such approximations. Unlike incremental approach, rational approach put more concern on meeting the current set objectives using available alternatives. Previous period’s budget bases are not required in this case. Budgeting basically involves estimating the current year’s turn out and for the following year (Rabin, 1992). Management The management part of best financial practice management involves financial presentation and value management of organization. This includes financial control mechanisms provided by the management of organizations. Value management focuses on evaluating the organization’s financial resources which are then ranked in order of importance to the organization. This provides an effective way for allocation of the resources that is also cost effective. This concept, also referred to as management of performance considers the time value of money with respect to resource allocation. First requisite for effective value management includes sources of funding for a public venture. This covers the obligation of a public organization and relationship between its funding, operations and output (Levacic, 1989). It is also important to consider activities performed by the organizations and the contribution of such activities to organization’s goals and strategic plans. Organizations also consider information sets they use, their leadership and processes integrated into the financial management system. These elements enable the organization to formulate decisions that will facilitate investment and disinvestment decisions. The decisions are based on efficient assessment, continuous development and ranking of acquired information Management in finance is considered as an important best practice management function applicable in all public sector organizations. Controls of finances also fall in the management department. Management of organizations design rules and procedures that identify and manage risks. Financial control ensures efficient utilization of financial resources including record keeping for easier accessibility information. Management of financial system calls for mastering of the internal and external audits. This includes central agencies, the parliament and government ministers. A risk management system is also developed to subject control of the organization basing on its prospective costs and benefits. The organization’s risk framework should be linked to its capital and operational risks in order to ensure efficiency. Management also requires that accountability is upheld at all levels of delegation of financial responsibilities. Chief financial officers need to develop a full understanding of risks associated with the organization. This jwill enable them to identify possible costs and benefits such risks will have to the organization. A plan is then developed to alleviate them, evade them or benefit from the same risks. Reporting Financial reporting is defined by national and international bodies within a country. Public and private partnerships and organizations are governed by reporting requirements provided by accounting bodies. Generally accepted accounting practice has designed standards that reporting of financial statements should be based on. Financial reports are meant to provide information used to analyze the productivity of the organization. This information is necessary to stakeholders of companies and any other supporters. The reports indicate organization’s level of assets and liabilities which define a company’s liquidity level and ability to meet its current obligations. Financial reports trace the sources of capital that organizations’ operations are based on. Reporting is able t o trace uses of such funds by assessing its applicability for the advantage of the business (Carlin, 2005). Organization’s cash flows are indicated by profits and losses stated in financial reports. This also indicates if all the business profits were invested and in what activities. Reporting concept and budgeting relate. Budgeting involves planning for the future while reporting provides information used in preparation of the plan. Reporting determines if the organization has enough resources to facilitate its expansion or growth in the future. It assumes users have full understanding of the accounting terminologies, measurement and reporting methods. Statutory law and ethical standards that governs reporting require to be followed in order for reports to be legal and ethical. Organizational reporting might however fail to consider such laws and standards. This might be as a result of change in the standards. Organizations therefore need to be always updated on the changes. Changes in reporting standards and laws are as a result of complexity in business operations. For example, the financial derivative contracts and instruments that organizations use from the previous traditional systems. This has also expanded their legal experiences in terms of laws and regulations that govern their business environment. Financial standards and ethics also solve the problem of scandals in the financial system. These include fraud and misappropriations in financial reporting (Levacic, 1989). Differences between full accrual, modified accrual and cash budget Full accrual involves basic revenue and expenditure recognition at the time they occur even before any payments are made. The process monitors transactions only without considering cash flows. Journal entries made on full accrual basis are used to translate fiduciary and proprietary funds to accrual accounting system. Full accrual trial balances are used to derive financial statements for funds and general entity. Full accrual enables the business to trace when expenses were incurred and income earned. Modified accrual on the other side involves both concepts of cash budgeting accounting and full accrual accounting. This approach records income as earned like in full accrual method. However, expenses are recognized only when actual payments are made unlike in full accrual where they are recognized the moment they are incurred. In case the business decides to acquire an assets and goes ahead to purchase it, such expenses will only be identified. It will only affect the business’ net income when cash is withdrawn or the check is cashed (Clare, 1994). Full accrual and modified accrual concepts vary in purpose of recording. Full accruals serve its purpose when businesses intend to record expenses and operations at the actual time when transactions were conducted involving less debt issues. It has an advantage for the business as it is timely and provides an efficient business control of cash flows. Modified accrual does not observe time of the accrual concept but gives the business a number of options in handling its expenses. The organization is able to modify its budgets to adjust to changes. This enables it to present costs to the strategic managers and directors at their actual occurrence. Full accrual concept does not consider delays in its accounting. Costs or expenses can be incurred by the organization but no actual payments made for months. This raises the need for businesses to keep records of its book values and real values of income and expenses. When expenses are recorded as they are incurred, executives might fail to establish projects that have been sanctioned and allocated within the budget. This is primarily because of recognizing costs only when the checks are cleared. Cash accounting differs from accrual accounting in the ways the two processes deal with debits and credits during bookkeeping. Cash accounting and budgeting recognizes income items at the actual receipt of the income. In this case, income that is invoiced is not recognized as an asset until payment is made on the invoice. Cash accounting treats debts in the same way as income, such that incurred expenses are not posted until they are paid for. This differs from accrual accounting principles which recognizes income when earned. Invoices for good s and services are considered as assets of the organization before they are paid for. Invoices for expenses are also recorded as liabilities and recognized as they are incurred (Carlin, 2005). Cash budget is another concept of financial accounting and is prepared in cash accounting. Cash budgeting are drawn after operating budgets are drawn. These include administrative, sales manufacturing, purchasing expenses and capital expenditure budgets. Balance for cash from the previous period is carried forward as opening balance. Cash inflows for the period are then added to determine the available cash. Cash balance for financing is obtained by deducting cash outflows of current period from the cash balance. In case the cash requirement of the company fails to be met by the cash balance, company’s finance section makes provisions for debt finance needed. Debt repayments are indicated in the budget with the interest’s repayments stated. Information provided by the cash budget is used in profoma balance sheet. This is a balance sheet of proposed financial operations which are not actually performed. Full and modified accruals are included in the actual income statement and balance sheet. Modified and accruals record transactions that have been carried out but partly performed. Although payments are not yet made, they have already occurred. Proforma income statements are prepared as a result of proposed activities that have neither occurred nor paid for. Cash budgets are used by companies to determine its sufficiency of funds for their regular operations. Allocation of cash can also be traced to determine if the company’s cash is being utilized productively. Cash budget involves estimation of most financial, elements within the company and its environment. it forms a major plan for the management of a company that tests its viability. Sales estimates are made considering different aspects surrounding sales and the market. The management will consider any possible competition, the local economic climate and the company’s internal operation strengths. Other than sales, costs are also derived basing on past experiences and what is expected. On the other hand, full and modified accruals are not estimated but based on actual occurrence. Modified accruals further records complete transactions with payments made. They therefore do not require information from past experience to approximate the actual figures. Cash budget and modified accrual takes into consideration the time factor that transactions are carried out. Full accrual on the other side ignores the aspect of time and its relevance in transactions. Cash budget has three major components which include time period, the anticipated cash position and organization’s estimated sales and expenses. Full accrual is only interested in the nature of transactions and how they match revenues with expenses. Cash budgets provide information that the management can use in formulating decisions regarding the organization’s cash position. It provides the monitoring procedures necessary to trace cash flows through the business. Such monitoring procedures ensure efficient use of cash and other resources while tracking seasonal fluctuations. While full accrual and modified accrual concepts involve revenues and expenses, cash budget involves sales and revenues and in addition cash position that the business desires. Transparency Transparency in financial, management involves open communication of the business position performance to company’s stakeholders. This includes both public and private companies. However, transparency is more important for companies trading publicly since they have large numbers of shareholder. Transparency in financial management is the responsibility of a company’s managers towards its owners. Corporate governance ensures accountability and motivation on the part of managers. Motivated managers focus on creating value for the firm rather than their own personal interests. Corporate transparency is generally availing of information that is relevant and reliable concerning a company’s performance of the period, investment prospects, governance the risks that the company is exposed to (Bushman et al, 2001). Corporate transparency can be measured in terms of the quality of corporate reports which feature measurement principles. It also reflects the quality of audits, time factor and reliability against other firms in domestic market. a second measure for corporate reliability is intensity to acquire private statistics. This includes analysis of investment systems and trading activities. Another measure is the quality of channels used to distribute information. These include dominance in the media industry of the private and public sector. Transparent markets, just like business ensure efficiency in performance. Laws and regulations nationally and internationally provide necessary jurisdictions that encourage transparency in organizations and general sectors. Bodies like International Accounting Standards regulate the preparation and reporting of accounting information in public and private sectors. Transparency observes timely preparation of financial accounts and authorized persons who are allowed to use the information. Organizations adhere to such principles in preparing and reporting to stakeholders. Security Exchange Commission of the US government provides the accrual basis for preparation of accounts. Firms need to state methods they use in displaying such information. Transparency allows investors, stakeholders and analysts a chance to understand the operations of the firm. They are able to identify areas within the firm, that are less or more profitable. The management therefore pressure propels the management to improve performance and attain results that stakeholders desire. Examples of reporting distortions or discrepancies when using specific accounting tools There are reporting distortions and discrepancies that are likely to occur as a result of employing accounting tools. Recognizing revenues before payments in accrual accounting can lead to financial imbalance in the company. This will occur as a result of misrepresentation of financial accounts since some earned revenues might not be paid. The misrepresentation might result to financial downturn in the company in the future date. The firm’s future earnings are likely to suffer when clients fail to honor the already recognized revenue. Accumulated doubtful payments in company’s earnings and revenues might be understated. This will give a wrong impression of the company’s status. Accrual accounting poses a challenge to the stakeholders since they might fail to understand the extent to which revenues have been puffed with nonpayment (Corbett, 1992). Recording discrepancies also occur where cash accounting is used. Accounting errors like principle errors, errors of original entry and errors of commission affect the reporting of accounts information. Cash accounting method has a bigger disadvantage for business accounts reporting. The method is not accepted by the Generally Accepted Accounting Standards. After preparation of the journals, the accounting information is translated to accrual accounting method before being reported (Management Advisory Board, 1997). Conclusion Best practice financial management is practiced by both private and public sectors to increase productivity and enhance efficiency. This is achieved through concepts like accrual accounting, financial control and management, budgeting and reporting. There are also international accounting bodies that govern preparation of financial accounts and enhance their efficiency. Financial management provides transparency to stakeholders by ensuring that financial information is communicated, on timely bases and under correct procedures. References Carlin, T.M. (2005). Debating the impact of accrual accounting and reporting in the public sector. Financial Accountability & Management, 21(3). Clare, R. (1994). Accrual Accounting: fad or necessity? Directions in Government, 8(4), 30-32. Commonwealth Department of Finance. (1994). The new financial reports of agencies. Canberra: AGPS. Corbett, D. (1992). Australian public sector management (Chapter 5). Allen and Unwin. (Dixson 354.9407/C789) Department of Finance (1992). Supplementary financial statements 1991-92. Canberra. Levacic, R. (Ed.). (1989). Financial Management in Education. Open University Press, Milton. (Dixson 379.11/L655f) Lynch, T.D., & Martin, L.L. (1993). Handbook of comparative public budgeting and financial management. New York: Marcel Dekker. (Dixson 336/L987h) Nicholls, D. (1991). Managing State finance: The NSW experience. Sydney: NSW Treasury. (Dixson 336.944 N613M) Rabin, J. (Ed.). (1992). Handbook of public budgeting. New York: Marcel Dekker. (Dixson 350.722/236) Management Advisory Board (1997). Beyond bean counting: Effective financial management in the APS - 1998 and Beyond. Canberra: AGPS. Wanna, J., O'Faircheallough, C., & Weller, P. (1999). Reform of budgeting and financial management (Chapter 8, pp. 126-144). Public Sector Management in Australia (2nd ed.). South Yarra: Macmillan. Bushman, R., Q. Chen, E. Engel, and A. Smith. (2000). “The Sensitivity of Corporate Governance Systems to the Timeliness of Accounting Earnings.” Unpublished paper, University of Chicago. Read More